Tags: stock market | income | poverty | recession

Middle, Lower Classes Wary of Stocks Since '09 Recession

By    |   Monday, 27 October 2014 12:33 PM

The recession of 2007-2009 caused many middle-income and lower-income families to flee the stock market in fear and never return, often with devastating financial results and a sharp increase in the ever-widening income inequality gap.

A new study from the University of Michigan shows that fewer and fewer American families, especially those hurt badly by the recession, are participating in the stock market because of a "once burned, twice shy" factor, which, in the long run, is costing them money, The Wall Street Journal reports.

The number of American families who own stocks today has plummeted from 30 percent in 2001 to around 16 percent, "the same level as 1962," the study found.

And, once again, the study shows that timing is everything.

Dean Maki, chief U.S. economist at Barclays, told the Journal, "One unfortunate effect of recessions and stock-market declines is they often induce people to exit the market at exactly the wrong time. In retrospect, anyway, the right thing to do would have been to buy more equities at the trough, not to sell equities at the trough.”

University of Michigan researcher Frank Stafford said, "Households with limited income and assets who suffer adverse experiences caused by a recession, such as the unemployment of a primary earner, are likely to lose what we call 'confidence capital.'

"Going forward, this loss makes it unlikely they will re-enter the stock market. And the fact that they are not participating in the stock market makes it unlikely that they will build significant assets. It's really a vicious circle."

The Journal reports that 5.4 million families sold stocks following the recession, either from real or perceived economic need, and lost out on profits when the market rebounded.

"Only households in the top 10 percent have been increasingly likely to own stocks," the Journal reports.

Higher education and higher income make it more likely that investing families will hang on to their investments during the recession and profit on the upswing.

"People with some college or higher education are more knowledgeable and may believe they can weather the storm," University of Michigan researcher Bing Chen told Phys.org. "They are also more likely to have stable jobs and better access to credit."

In the long run, Jeremy Siegel, a University of Pennsylvania economist, told the Journal, stocks have outperformed bonds, gold and the dollar by 6.7 percent per year for the past 200 years.

While middle-income and lower-income families largely missed out on stock market gains, the wealthy did much better. According to the Fed, those in the top 3 percent of income held 54 percent of the nation's wealth in 2013, up from 45 percent in 1989, while in the same time period, the lower 90 percent saw their percentage drop from 33 percent to 25 percent.

The value of stocks owned fell from $232,900 in 2007 to $194,900 two years later, the Michigan researchers reported in Phys.org.

Shai Akabas, an economist at the Bipartisan Policy Center, told the Journal, "There certainly is a widening gap there in terms of the return that higher-income people are receiving in the market.

"Lower-to-middle-income people aren’t privy to those gains. That’s exacerbated by the fact that many of them have taken their money out of the stock market."

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The recession of 2007-2009 caused many middle- and lower-income families to flee the stock market, often with devastating financial results and a sharp increase in the ever-widening income inequality gap, a study shows.
stock market, income, poverty, recession
Monday, 27 October 2014 12:33 PM
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